Financial Accounting May/June 2015

Question 4

  1.           (a)      What is a manufacturing account?

              (b)     Explain the following terms:

    (i)      prime cost;
    (ii)      factory overheads;
    (iii)     work-in-progress;
    (iv)     cost of goods transferred;
    (v)      finished goods;
    (vi)     profit on manufacturing.

Observation

Majority of the candidates that attempted this question could not explain the terms and the performance was poor.  The expected answers include:

(a)      -        A Manufacturing Account – is an account prepared by organizations
engaged in the production of goods;
-        It is prepared to ascertain the total cost of production.

(b)     (i)      Prime Cost  - 

-        This is the cost that can be traced to a particular production unit;
-        The components are direct materials cost, direct labour cost and direct expenses.

(ii)      Factory Overheads

-        These are indirect cost incurred in running the factory;                  
-        They are cost which cannot be traced to a particular production unit.

(iii)     Work-in-Progress

-        These are partly finished goods or uncompleted works.

(iv)     Cost of goods transferred

          -        This is the total production cost of finished goods;
-        This is transferred from the Manufacturing Account to the Trading Account.

(v)      Finished goods

-        These are products that have passed through the manufacturing process;
-        They are goods that are available for distribution to customers.

          (vi)     Profit on Manufacturing

-        This is the excess of market value over the production cost of finished goods.